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What If Your 529 Account Gets Too Big? Thumbnail

What If Your 529 Account Gets Too Big?

Parents seem to have a lot of worries about 529 Accounts. Recently, for the first time, I talked to a Doctor who casually remarked to me: "I've read about some people who contributed a lot their 529 Plans and then the market did really well and now they have too much money in their 529 Plan! More than they need for college!"

This may seem like a high-class problem to have, but the comment reveals some important truths.

1. You can always withdrawal your contributions to a 529 Plan penalty and tax free. Only the earnings from those contributions are taxed and assessed a penalty if you use them for something other than a qualifying education expense. Imagine you opened your kid's 529 Plan a year ago. You had the foresight to take advantage of the super gifting rule and both you and your spouse in aggregate contributed $150,000 on behalf of your child. Let's say you invested the full amount in the stock market. Well the S&P 500 doubled since the Covid lows. Your 529 account could be, serendipitously, worth over $300,000 already. You are allowed to withdrawal your original $150,000 in contributions and now the stock market just paid for your kid's college tuition. As a reminder, to attend most universities today for four years, with all costs including tuition and books and room and board, costs about that much. 

2. Any residual money leftover once your kid(s) finish university can be applied later to graduate school. The costs of law school or business school can be much greater than undergraduate tuition. Imagine informing your kids that because of your excellent planning that they can afford any graduate school education they desire?

3. After your kids are fully educated, you can simply change the names on the beneficiaries and effectively create a family 529 Plan. What a legacy it would be to pay for your kids' college and to enable them to do the same for their kids.

4. If you take all of your contributions out of a 529 and your kids already have their education all paid for and you don't want to create a family legacy fund, well, you can still obtain your excess cash and use it for any purpose you want. You simply pay the normal tax rates and a 10% penalty.

529 Plans offer a more flexible than meets the eye tax-free way to pay for your kids' education. Further, 529 plans are available to everyone, regardless of your income or where you work. If you have been on the fence about starting a 529 Plan, we'd encourage you to get started!